Jesse Kline: Stop avoiding the real issues in the housing market

Housing bubble: Stop avoiding the real issues in the housing market

Despite the federal government having tweaked the rules under which Canadians can obtain Canada Mortgage Housing Corporation-insured mortgages multiple times since 2008, analysts at Moody’s Investors Service think the latest changes may have come “too late to avoid a housing correction.” Last week the finance ministry announced that, beginning July 9, the maximum amortization period on government-backed mortgages will drop from 30 to 25 years; the limit on borrowing against the value of a home slides from 85% to 80%; and the CMHC will no longer insure properties over $1-million.

The CMHC is a Crown Corporation that provides mortgage insurance. By law, any mortgage where the purchaser has put less than 20% of the value of the house down, requires insurance. The CMHC is backed by the full faith and credit of the federal government. When the government wishes to tamper with the Canadian housing market, it does so by amending the regulations concerning which mortgages the CMHC can insure.

The changes are designed to change the incentives for home purchases, as Canadian debt levels are reaching rates that have become alarming to many analysts. According to a Moody’s report released Monday, however, “the government’s moves may have come too late, owing to the build-up in consumer debt that has already occurred.” And all the previous times the government has fiddled with lending rules? They “failed to stop Canadian household leverage from increasing.”

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The government would like to think of the economy as a puppet show: Pull a few strings here and a few strings there, and everyone will behave exactly the way they want. The problem is that this is not how complex consumer economies, like Canada’s, actually work. As central planners in former Communist-Bloc countries learned first hand, authorities never have enough information to successfully plan an entire economy.

By tinkering with the rules once a year or so, Finance Minister Jim Flaherty is conveniently skirting the real reasons behind the increase in Canadian mortgage debt. As Mr. Flaherty freely admitted in a meeting with the National Post editorial board in April, Canadians are racking up so much debt because interest rates are so low. The analysts at Moody’s agree: “Canadian consumers’ reliance on low interest rates to support high debt loads remains a risk.”

The Bank of Canada, of course, operates at an arms-length from the government, so the problem cannot be solved by the finance minister implementing a few regulatory changes. What Canada needs is a clear strategy to reduce the central bank’s control over interest rates, and have them pegged closer to what the market rate would be in the absence of government interference.

The new rule barring the CMHC from insuring homes valued at over $1-million is also an important first step. The government should continue to reduce this threshold, in order to allow more private-sector mortgage insurers to compete in the marketplace. There are a lot of changes that would need to be made to reduce our reliance on the CMHC, but it would nice to see the government show its commitment to free markets by formulating a plan to do just that.

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